The Unassuming Economist

“The moderate upward trend in housing prices continues and the appropriate response at this stage is close monitoring and readying the macroprudential toolkit. After years of stagnation, nominal housing prices at the aggregate level have grown at an annual pace of 3–4 percent for the past five years—only marginally faster than the growth in disposable income. In spite of falling lending rates, mortgage loan growth remains modest and lending standards appear stable. Thus, there are no signs of overheating yet. Nonetheless, developments in the most dynamic segments, such as apartments in large cities, deserve particular supervisory attention, and efforts to step up data collection on mortgage loan terms and conditions need to continue, including because of a significant share of high reported loan-to-value ratios (LTVs) in those segments in a recent Bundesbank survey. Last December, the Financial Stability Committee (FSC) announced that it was examining an expansion of the German macroprudential toolkit, as recommended by the FSB and the Fund last year. Introducing instruments constraining mortgage loan eligibility, such as loan-tovalue and debt-service-to-income limits, would be very helpful, not only because they might be needed in the future, but also because of the signaling value of this policy decision. A carefully designed communication strategy would help make the most of this signaling value,” according to the latest IMF report on Germany. 

On foreign-currency mortgages, the new IMF report on Poland says that “While tighter prudential regulation has halted new FX lending, a substantial legacy stock of these loans remains. Close to half of mortgages are denominated in FX (mostly Swiss franc), exposing households and banks to sudden zloty depreciation—as was the case in January when the zloty depreciated around 20 percent against the Swiss franc. As such, the January episode had little macroeconomic impact and high capital buffers in banks mitigated financial stability risks. In addition, the availability of emergency liquidity assistance from the NBP, supported by the swap line with the Swiss National Bank, further mitigated risks (…).”

On the housing market, “they [the French government] do not see risks to financial stability at this point, given prudent lending practices based on repayment ability, the predominance of fixed-rate mortgages, and the mortgage insurance scheme”, according to the new IMF report on France.

Moreover, the report says that “More could be done to alleviate structural rigidities in the housing market. Residential construction has fallen by 14 percent, and real house prices by 11 percent, since the peak in 2007. While this decline is partly cyclical, a succession of laws introducing regulatory and tax changes may also have contributed. Another long-standing factor affecting the market is the extensive system of housing subsidies, which include rental cash assistance (received by 44 percent of tenants), subsidized mortgage rates for households, and fiscal breaks for providers (including of social housing), together amounting to 1.9 percent of GDP in 2013. While these were aimed at making housing more affordable, studies have found that rental assistance may contribute to rising rents. Staff recommended reviewing the functioning of the housing market, with a view to alleviating constraints on the supply of affordable housing and improving the targeting of benefits.”

A separate IMF note on the Financial Sector, Housing Prices and Private Balance Sheets notes the following: “House prices have continued to decline gently since their peak in 2011, but affordability metrics remain above long-run averages. House price overvaluation is currently estimated at around 10–15 percent. Nevertheless, household debt appears manageable, at around 10–15 percent. 

Also, a separate IMF report on US housing finance notes that “While a number of important steps have been taken to address the structural weaknesses exposed by the crisis in mortgage markets, comprehensive housing finance reform remains the largest piece of unfinished business. In particular, it is not clear when Fannie Mae and Freddie Mac will exit conservatorship and what an end point for a reformed housing finance system will look like. This creates not only fiscal but also financial risks: moral hazard from coverage of credit losses by the government or the government-sponsored enterprises, a distorted competitive landscape due to the dominant footprint of Fannie Mae and Freddie Mac, and large subsidies for homeownership that create incentives to take on excessive levels of household debt.”

Since the Great Recession, there has been a lot of research done on macroprudential policy. Here is the new research of the past month:

Macruprudential policy in country-specific cases: A new IMF paper reviews the use of macroprudential policy in Hong Kong SAR, the Netherlands, New Zealand, Singapore, and Sweden. The analysis shows that each country reviewed adopted an institutional framework for macroprudential policy suited to their own circumstances. The evidence reviewed confirms that “one size does not fit all,” and that it is possible to conduct macroprudential policy with a heterogenous set of institutional frameworks. In all cases, most of the macroprudential tools used were directed at containing risks arising from a booming housing market (for e.g., LTV and DSTI ratio limits). This study complements an earlier note issued by the IMF, which provides a framework for staff’s advice on macroprudential policy in its bilateral surveillance.

Macroprudential policy in Asia and Pacific: A new working paper from the Bank for International Settlements (BIS) finds that macroprudential policies are more successful when they complement monetary policy by reinforcing monetary tightening, than when they act in opposite directions (on a related note, see Box IV.A of the latest BIS annual report).

Macroprudential policy in Europe: A new paper from the European Central Bank (ECB) says that policies need to be granular enough to deal with the fact that property credit cycles can exhibit strong regional features. There is increasing theoretical support and empirical evidence that borrower-based regulatory policies can be effective, diminishing the credibility of claims that there is not enough experience to practically apply such instruments. In the case of the euro area there may be room in a significant number of countries for putting these instruments more clearly in the hands of newly created macroprudential policy authorities and for creating coordination mechanisms for national LTV or DTI policies at the area-wide level to address the cross-border spillovers potentially caused by these policies.

Experience with macroprudential policy: Research by Kenneth N. Kuttner (Williams College) and Ilhyock Shim (BIS) concurs with the work of others who say that experience with macro-prudential policy measures in various countries is not extensive and may, in any case, have only limited applicability elsewhere because of differences in economic conditions, the relative importance of capital market and traditional bank intermediation, and many other factors. Therefore, it would be unwise to rely solely on macroprodudential policies for taming financial booms and busts.

Riksbank macroprudential conference: The Riksbank has started to hold an annual conference for frontier thinking on macroprudential policies. The keynote speaker at this year’s conference was Raghuram Rajan, Governor of the Reserve Bank of India. It also included presentations from: Jeremy Stein of Harvard University, Atif Mian of Princeton University, Gianni De Nicolò of the IMF and others.